February Market Commentary
Investing vs. trading, timing or speculating
The last 23 months of investment (and cryptocurrency and meme stock, etc.) returns have created a lot of “fear of missing out” (FOMO) in the investing public. FOMO tends to manifest itself in various behaviors in which otherwise rational individuals would not participate. We had a client relay a story of a recent college graduate taking their relatively meager graduation money and investing it in obscure cryptocurrencies and a few meme stocks and walking away with a 6-figure payday. With stories like this circulating, it’s no wonder many people are wanting a piece of the action so they too can fund lavish lifestyles on the backs of deteriorating companies and the latest of the 10,000+ cryptocurrencies that are currently in existence.
Stories like the above tend to bring out greedy behaviors in those that hear them. It’s a natural human reaction to hear a story of someone having a pile of money fall in their lap and wanting to replicate the “get-rich quick” scheme. Unfortunately, the stories of speculation gone wrong don’t tend to get told as frequently. As the old joke goes: Do you know how to make a small fortune speculating? Start with a large fortune.
At Wolf Group Capital Advisors, we understand there are nearly countless market participants with many motives for investing and a wide variety of different goals. We cater to those who are interested in having their money work as productively and prudently as possible for them over the long-term.
We do not consider ourselves traders and stay as far away from speculation as possible. We act in a fiduciary capacity for our clients and view ourselves as investors. Investors commit their hard-earned capital to well thought out investment opportunities. Investors strive to earn competitive market returns and benefit from long-term compounding on the growth of the underlying businesses in which they invest. Investors view time in the market as exponentially more important than timing the market.
Rationally, most people know that attempting to time the market is a flawed strategy and get rich quick ideas rarely lead to their desired outcome. However, the part of our brains given to irrational thought has a way of leading us down a path of taking these ill-advised risks. As we have seen, countless individuals lost a lot of wealth trying to choose which cryptocurrency would quintuple in price or identifying which poorly run company would get swept up in the next meme stock craze. The allure of turning a minor investment into something substantial is very appealing. Unfortunately, the degree of difficulty in executing it properly is extremely high. Having that $10,000 “investment” turn into $1,000 through speculation is much more likely.
Though, like many things in investing, buying undervalued or reasonably priced assets and holding them for a long period of time without interfering with the process is much easier said than done. As Howard Marks wrote in his January 2022 Selling Out memo:
Everyone wishes they’d bought Amazon at $5 on the first day of 1998, since it’s now up 660x at $3,304.
• But who would have continued to hold when the stock hit $85 in 1999 – up 17x in less than two years?
• Who among those who held on would have been able to avoid panicking in 2001, as the price fell 93%, to $6?
• And who wouldn’t have sold by late 2015 when it hit $600 – up 100x from the 2001 low? Yet anyone who sold at $600 captured only the first 18% of the overall rise from that low.
This reminds me of the time I once visited Malibu with a friend and mentioned that the Rindge family is said to have bought the entire area – all 13,330 acres – in 1892 for $300,000, or $22.50 per acre. (It’s clearly worth many billions today.) My friend said, “I’d like to have bought all of Malibu for $300,000.” My response was simple: “you would have sold it when it got to $600,000.”
As you can see from Marks’ comments above, buying and holding for the long-term is a bit more challenging in practice than it is in theory.
There is no doubt that identifying a single asset that appreciates 660x its value over the course of roughly 25 years and holding onto it throughout that entire, uncertain period is exceedingly difficult. However, buying a diversified portfolio of financial assets that achieves a reasonable rate of return over a long period of time is a much more attainable objective.
Let’s use an example to help illustrate the power of long-term investing. Imagine a recent college graduate that is just beginning her career. For every $1,000 she is able to invest today, assuming a 7% rate of return, she will have over $7,600 after 30 years, nearly $15,000 after 40 years and more than $29,000 after 50 years. As is clear from the above example, investing for the long-term and not tinkering with the process should allow an investor to be in a terrific financial position by the time they transition from full-time work to something less strenuous.
Time is on the investors’ side. For all of Warren Buffett and Charlie Munger’s investment prowess, one of the most fortunate factors for each of them is living a very long life (to allow the magic of compounding to work over numerous decades). The bulk of each of their fortunes has been accumulated after age 65.
To summarize, while the allure of trading in and out of markets and buying speculative securities on the hopes of achieving outsized returns always exists, the likelihood of successfully executing these approaches is negligible. Utilizing the services of a professional advisor to invest in a diversified portfolio of securities to achieve a reasonable rate of return for one’s given level of risk is a strategy much more likely to lead to desired results. Growing wealth in a mindful, measured fashion offers our clients a much more systematic approach and time-tested strategy. This, in turn, allows them to focus on things they truly care about while creating a much greater opportunity for them to live a fulfilling life.
Written by Charles Verruggio, Chief Investment Officer